I have done some stock research in the past but have never pulled the trigger. There is one website that has very interesting information on the subject.http://www.fordinv.com/html/rs_specialStudies.htm
I suggest you read the studies, starting with the oldest one.

I have been doing some basic research on applying long term trend following principles to stocks. It seems to me that they can work reasonably well on the small/ midcap universe where one can really pick up on some outsize moves(ie doubling or tripling of stocks) rather than the large cap stocks which tend to have huge retracements and not provide the same opportunity for profit.

Has anyone else done research on this and did they have similar findings?

and have short funds available. I am doing research on how to quantify and bring closer to the turtle rules the basic fund switching techniques,
if trend following can be used at the stock market it may be with leveraged index funds and perhaps individual stocks - must be a great stock picker, so I pass.....
- These funds used to trend rather well when we had a long term trend in the markets. i.e. before the death of the Bull.
- Sector funds are available to have long/short pairs
- deversification is built in (via sectors)
I don't know how to account for betsize optimization when some funds
only allow unit to be traded as $10,000 or $25,000 - initial account must
be huge to take a bite that big however exit can be adjusted to percent loss (2 percent or 1)
Now the stock markets trend no more I find my focus back in the futures arena but stocks I think have a void in good long term systems.

Now the stock markets trend no more I find my focus back in the futures arena but stocks I think have a void in good long term systems.

Tradingcoach,

Funny that you wrote that, over the last six weeks I have caught one of my best uptrends in the stock market in the last 3 years ... I now see that different people have different definitions of trend.

I am a little unclear as to why you would end up emulating an index if you trade many of the strongest stocks out there. If you are picking stocks by a long term trend following methodology then you will stay with the strong stocks and sell the weak ones. Thus concentrating your holdings into the strongest stocks in the index. You would not have exposure to the losers so would not emulate the index.

I am a little unclear as to why you would end up emulating an index if you trade many of the strongest stocks out there. If you are picking stocks by a long term trend following methodology then you will stay with the strong stocks and sell the weak ones. Thus concentrating your holdings into the strongest stocks in the index. You would not have exposure to the losers so would not emulate the index.

Perhaps I am missing something but that is my perspective.

rs

Think of it this way. Let's say every stock movement has two components. Component one is the underlying movement of the market (or at least that market sector) which moves the stock along, while component two is movement specific to the individual stock. Now just assume each component has a 50% weight in the movement of stocks.

If you buy one stock, then the market movement and the individual stock movement has about equal proportion. Now say you buy a second stock in the same market sector. In this case the market component for the two stocks will be exactly the same, and exert upward/downward pressure on the stocks at the same time. However, the individual components are not perfectly correlated, so they will at times cancel each other out. So the net effect is that the market component now has a greater total impact on your portfolio. This process continues as you add more stocks to your portfolio (assuming they are correlated in the broad market sense).

I understand the mechanics of portfolio theory and Beta which is basically what you have described. But that applies only to a buy and hold portfolio of diversified stocks. If you trade a long term trend following system you are selling losers and riding winners thus your exposure will be higher to winning stocks and you will have small losses on the weak stocks.

I do some trend following on equities with reasonable success using spead betting with contracts for difference. The advantage of these instruments is obviously leverage and the ability to short. It's an accessible and low cost way to trade the equity markets. I'm using CSI end of day charting and the integral charting system to run some moving averages, plus a couple of entry filters. Because there is less volatility in the underlying instruments, it works pretty well on this basis.

In this article, using data from 12/71 until 09/90, they found that :
- 1 month relative strength is bad : you should sell the stocks that have the highest one month return and buy the stocks that have the lowest one month return.
- 3 months relative strength is bad, also.
- 12 months relative strength is good : you should buy the stocks that have the highest one year return and sell the stocks that have the lowest one year return.

They come up with a formula that optimizes stock selection : you should buy stocks with the highest PRM (price momentum) where PRM is :

Ironically it does not do too well on the short side. Volatlity is the major factor.
I have not completed the system. I need to think over some design detials. It is written in C++.
I have some graphs created using R. I can post those if there is further interest -- histograms and charts.

You stated that ironically your model didn't work well on the short side.

My day job is as a forensic analyst uncovering shorting opportunities, working for one of the larger short sellers in the market.

I'd just make a couple of observations that might help.

1.) The performance of long stocks seems to behave differently than short positions. Almost all of the money I've made on shorts has come very quickly rather than the stock slowly declining in value. My guess is that this is because when a company warns investors of an earnings short fall, for example, people run for the exits fast and then "figure it out" later. So, you'll get some huge moves very quickly.

This means that the long model shouldn't look like the short model. If I understand what you posted correctly, you used different time periods. But, possibly you need to go further in tweaking the short model to capture the bigger profits that tend to happen more quickly.

2.) Since bull periods seem to be more prevalent than bear periods (using the normal business cycle it would be 3:1), you're shorts using your model probably shouldn't perform nearly as well. So, possibly some sort of filter needs to be added to determine if the market as a whole is more conducive for being long or short and then taking the positions accordingly? For example, William J. O'Neill of Investors Business Daily has stated that in bull periods, 85% of the stocks will trend up (I'm going from recollection here, the actual numbers may be different).

3.) You should short stocks anyway because the risk of being in the market during a down period is considerably greater than being out of the market during a bull period. So, don't be tempted to just be "long only." A lot of professors talk about why market timing doesn't work because if you were out of the market the 5 best days of the year, you wouldn't make any money (or something similar to this). What they don't tell you is that if you're in the market the 5 worst days, your results are much, much worse. So, you should short anyway.

4.) The "forensic" in forensic analyst means that I look at accounting shenanigans to improve the odds of finding good short candidates. If you're fishing in the right part of the lake, you may have a better chance of actually catching something. Typically, this type of analysis yields much higher probabilities of finding companies that announce an earnings shortfall or an SEC investigation. This improves your chances of finding a good short idea. A study has actually been done on this. I would need to dig up the statistics though. I am not sure how you could create this in a model though.

I agree that trading on the short side is helped greatly by looking for troubled companies. I have found that even just going to the "potential" problem companies can help significantly. Like just screening for high debt and downwards earnings drift. Simple fundamental screens can really improve your odds on the downside. Obviously this is a lot lighter then the work that you do but it does up the odds on the short side and are easily screened with most stock screeners. And then you can throw the screened stocks into a technical trading system.

One thing that I have found to be true as well is stocks go down faster then up. I ratchet down my stops a lot faster on the short side then on the long side due to the drastic moves for shorts.